Financial markets and integration: The case of Bosnia and Herzegovina

Abstract

Integrating a country into a global financial system is a difficult task. This task is even more challenging when faced with a country that has a highly complex political system. Bosnia and Herzegovina (B&H) is a perfect example of a country having two separate government entities with four different levels that are further divided along political and ethnic lines. Bosnia is a small, open economy that has been going through the transition process since the Dayton Peace Agreement ended the aggression in 1995. It consists of two semi-autonomous political entities: The Federation of Bosnia and Herzegovina (hereafter FBIH) and Republika Srpska (hereafter RS), with District Brčko as a de facto third entity. FBIH is further divided into ten cantons. Even though B&H is a small open economy, it is rich in natural resources and has excellent potential for economic growth. However, to reach its full economic potential, the country must integrate more closely with regional and international markets. Leaving behind the socialist economic system, B&H committed itself to developing market-oriented economic policies and systems. With the technical and financial assistance of the international community and international financial institutions, B&H embarked on several structural reforms and investment programs right after the Dayton Peace Agreement was signed in 1995. However, due to the complex nature of the B&H government, these reforms have not been entirely successful, and critical reforms are yet to be addressed. More than two decades after the aggression, B&H faces a slow and stagnant economic growth with weak institutions making it vulnerable and unstable. Better integration of the country, both internally and externally, is needed for B&H to grow further. It is believed that the government can overcome other differences with better economic and financial integration. The absence of an integrated economic area within the country harms the economic development and performance of all sectors of the B&H economy. As pointed out by many, the main culprits for such situations are a fragmented administrative structure, partly different legal frameworks and implementation practices, a weak rule of law, lengthy bureaucratic procedures, and low-quality public administration.